The D.C. Circuit's opinion in Siegel v. SEC (No. 08-1379, Jan. 12, 2010) contains at least two lessons. First, the D.C. Circuit continues its longstanding practice of stridently criticizing the agency's decisionmaking. Second, causation principles, which have been used so effectively since Dura to limit recovery of private plaintiff's' damages, also limit the ability of regulators to impose restitution as a remedy in brokers' disciplinary proceedings. Calling the SEC's decision "incomprehensible" and "border[ing] on whimsical"and its reasoning "nonsense," the court vacated the SEC's affirmance of a NASD (now FINRA) order awarding restitution to investors who purchased investments from a registered representative, even though it affirmed the finding that the broker violated the SRO's selling away and suitability rules. The court also confirmed the order that the six-month suspensions for each violation would run consecutively, and not concurrently.

Adjudicators may order restitution when an identiable person ... has suffered a quantifiable loss as a result of a respondent's misconduct, particularly where a respondent has benefitted from the misconduct.

In this case, the broker recommended to two sophisticated investors that they invest in a speculative start-up investment with whom the broker had a relationship that he did not disclose to his firm. The broker did not review the offering documents provided by the start-up, which were deficient in describing the nature of the investment. Ultimately, the venture failed. None of the investors nor the broker made any money from the venture. While the NASD Hearing Panel declined to award restitution, the NASD appellate body ordered the broker to pay restitution to the investors in the amount of their losses, and the SEC affirmed the order. The D.C. Circuit, however, agreed with the broker that the SEC failed to assess the "cause" of the losses suffered by the investors, and thus the agency's decision to uphold the NASD order was an abuse of discretion.

The opinion makes clear that "but for" causation, or reliance, is not sufficient to establish the requisite causation to justify restitution. "If the plaintiffs would have lost their investment regardless of the fraud, any award of damages to them would be a windfall...." While the court does not go so far as to require "loss causation" under Dura and its progeny, the SEC must offer some test of causation to establish a meaningful causal connection to justify restitution under Principle 5. It also noted that it had found no SEC precedent to support restitution in these circumstances:

...[T]his case involves wealthy and sophisticated customers, who were not pressed to decide whether to invest; customers who invested in furtherance of their specific desires to speculate in a high risk venture; and a broker who did not profit from his wrongdoing and who has been fined and suspended for his violation. The SEC has never ordered restitution in a situation such as this. Indeed, all of the cases cited by the SEC indicate that restitution has been ordered only in situations in which causation is clear, i.e., there has been proof that the amount charged in restitution is closely and inextricably tied to the amount lost as a result of the broker's wrongdoing.